The November Employment Report: Not So Fast

Morris Segall      absence of high paying job creation, consumer spending, employment report, job creation, long term unemployment, low paying job creation, seasonal service sector jobs

The November employment report showed an increase of 120,000 new jobs, 140,000 in the private sector and a loss of 20,000 in the government sector. The latter continues the negative trend begun in the second half of 2008. Of import was the sharp drop in the unemployment rate from 9.0% (which has been the level over the past 12 months) to 8.6%, the lowest level since March, 2009. Additionally, prior months job gains in September and October were revised upward by a total of 72,000, moving the average monthly gain in job creation over the past three months up to 143,000 versus an average of 76,000 over the prior four months.

As impressive as the headline numbers appear, one needs to analyze the details behind the numbers. Upon further examination we find the following:

1. The large drop in the unemployment rate reflects a large drop in the labor force of over 300,000
persons in the month of November. This is indicative of a continuing flow of discouraged workers
leaving the workforce which now numbers over 2.5 million and causing the labor force participation
rate to fall to a multi-year low of 64%.

2. The number of unemployed over a 5-26 week period actually increased by over 30,000 persons in
November from September levels.

3. Virtually all of the job gains since September have come from the service sector sector, notably retail
trade, professional and business services, most of which were temp jobs, healthcare services and
leisure and hospitality jobs. Most of the retail and leisure and hospitality jobs are seasonal and are
considered temporary. All of these service sector jobs are generally lower paying jobs relative to
manufacturing, construction and goods producing jobs which are not showing increases over the
past three months.

4. Average hourly earnings are little changed over the September-November period despite the large
increase in monthly job creation. This further validates our thesis that the bulk of the jobs being
added are low paying.

5. The average duration of unemployment in weeks amounted to nearly 41% in November, near the post
recession highs of 40%-45%, despite the increase in job creation since September and the recent
decline in first time unemployment claims during this same period and a decline in the number of
unemployed of 5 weeks or less.

So, while the increase in job creation since September is welcome and helpful to income creation and consumer spending in the near term, we must look at these numbers with circumspect as they may not last and appear to do little to improve the longer term unemployment distress in higher paying jobs and among the long term unemployed.

Morris R. Segall

August Employment: There is None

Morris Segall      Capital Markets, consumer sentiment, Economic stagnation, economy, employment, employment report, future trends, government, government stimulus, manufacturing, private sector investment, recession, slowdown, unemployment

Today’s employment report for August continued a worsening trend in the job market we have noted in our blog and website articles since June. Rather than another month of paltry job growth seen since May, job creation in August was zero. The last time the monthly employment report recorded an absence of job creation was last September. In addition, job creation for the months of June and July were revised downward a combined 58,000 jobs. Thus, over the last three months, job creation has averaged 35,000 jobs versus an average of 153,000 over the first five months of this year. Even the private sector, which has been creating a moderate level of jobs so far this year, dropped to nearly zero in job creation in August. More distressing is the event we have feared since the economy and employment faded through the second quarter. That is the shift by employers from reduced job hiring to job layoffs. In the August report, a number of industries recorded job losses including: manufacturing; construction; retail trade; transportation and information technology. The latter includes striking Verizon employees but that does not account for all of the job loss in this sector. The government sector also shed another 17,000 jobs in August. Year to date, the government sector has reduced employment by over 260,000 jobs.

As bad as these numbers are, other data in the employment report for August are even more negative. The already weak average workweek declined to 34.2 hours from 34.3 hours in June and July and is at the low level of last August. Average hourly earnings declined from July levels and are less that 2% above year ago levels, well below nominal inflation. The number of involuntary part time workers increased by approximately 400,000 to over 8.8 million workers from July and is at the highest level since last August. As we reported in prior employment report articles, the number of unemployed 5-14 weeks had been expanding in recent months. Now those people are unemployed over 15 weeks and that category has expanded to almost 59% of the number of unemployed persons.

Combined with the very weak manufacturing data reported yesterday showing major declines in orders, shipments, backlogs and employment and the plummeting levels of consumer confidence in recent surveys, and we have an economy that is “stalled out” and on the verge of sliding back into recession. We have previously cautioned about such a prospect in previous blog articles if economic data over the summer did not improve materially and fast. It hasn’t.

The private sector is doing what we expected in a weakening economic environment-cutting back. The President is expected to announce new economic stimulus measures next week to help create jobs. They will not turn the economy around. The Fed will inaugurate a QE3 program to add more liquidity if recession is imminent. The impact will be similar to that of QE2- a temporary respite but damaging to the bond market and the value of the U.S. Dollar. Without the full participation of the private sector to invest heavily into the economy and hire workers, the current economic trends and pessimistic outlook will not change. This also does not augur well for U.S. and overseas capital markets.

Morris R. Segall

July Employment: Not Good Enough

Morris Segall      business retrenchment, Capital Markets, Economic Growth, economic recovery, employment report, GDP, job creation, recession, unemployment

July’s employment report was hailed with a sigh of relief. Total new job creation was over 100,000 with private sector job creation in excess of 150,000. This was the highest level of private sector job creation since 241,000 jobs were created in April. In addition, May and June employment was revised upward by a total of 56,000 jobs. Revised job creation for the two months amounted to 99,000 rather than the 43,000 previously reported. These numbers were interpreted to allay fears the economy was about to recede into recession.

While the July employment gain and previous months revisions were encouraging, in our opinion, the gains were not much more than statistical and change little in our view of the weak current employment environment.  In virtually all of the key measures of the job market, the July data continued the picture of a diminishing and discouraged work force, working stagnant hours and suffering from diminished employment.

According to the Household Survey, the civilian labor force contracted by almost 200,000 in the month of July and is 400,000 persons lower than year earlier levels. The employment/population ratio has fallen to 58.1% from 58.4% in July, 2010 and is at a 28 year low. The number of people not in the labor force has risen to 86.4 million, an increase of 374,000 from June and 2.1 million higher than year earlier levels. The unemployment rate for July was 9.1%, virtually unchanged from the May-June levels and only fractionally lower than the 9.5% of July, 2010. In addition, 2.5 million people could find only part time work in July, an increase of 116,000 from June and over 200,000 higher than year earlier levels. The average workweek continued to be an anemic 34.3 hours, virtually unchanged for a year.  The average duration of unemployment in July rose to 40.4 weeks, up from 33.0 weeks in July, 2010. The total number of unemployed plus all persons marginally attached to the labor force and those working part time involuntarily, remained over 16%, virtually unchanged since April of this year and only fractionally lower than the 16.5% of July 2010.

On a more positive note, the important Professional and Business Services segment continued to show important progress with further gains in Computer systems design, Management and technical consulting services and Administrative jobs while temp jobs actually declined from May levels.

In summary, private sector job growth accelerated in July from weak levels of May and June. The job creation in the private sector continued to be offset by large job losses in the government sector, averaging 39,000 over the last three months. In fact, even with the increased job growth in July, net employment growth over the last three months averaged 111,000, down from an average of nearly 180,000 over the first four months of this year. This just isn’t good enough to foster increased economic growth or business expansion. While we do not believe we are currently in recession, an absence of improvement in recent economic data, including employment, will in our opinion, lead to further business retrenchment. This business retrenchment will be intensified by the recent downgrade of the U.S. sovereign debt rating and the resulting deterioration in worldwide capital markets. This has raised the possibility of a recession later this year and next.

Morris R. Segall

In addition

Second Quarter backsliding

Morris Segall      consumer sentiment, consumer spending, Economic Growth, employment report, GDP, industrial production, inflation, retail sales, unemployment

Last week saw a number of important economic reports for the month of June, including wholesale and retail inflation, consumer sentiment from the University of Michigan/Reuters survey. There were no surprises to us in these reports. We expected inflation to recede from the elevated levels of the first five months of this year as energy prices declined in the month of June. We also expected consumer sentiment numbers to decline reflecting the weak stock market in May and most of June and the very weak employment situation in both months (See our blog article of July 8 on June unemployment).  For us however, the two economic reports of most importance were retail sales and industrial production. If there were going to be signs of improvement from the very weak data reported in May, it would be seen in these two reports.

Unfortunately, while retail sales, excluding grocery store and gasoline station sales, increased .3% in June from depressed May levels, June retail sales were essentially flat with the level of April and lower than the peak level of sales in March. So it would appear consumer discretionary spending is down at the end of the second quarter from the peak levels at the end of the first.

We were anxious to see the Fed’s June report on industrial production and capacity utilization to see again if our expectations of a June rebound in industrial activity would be fulfilled. Here too we were disappointed with the results. Similar to the retail sales report, June industrial production did improve from weak May data but only by a slim .2% and all of the increase came in mining and primarily from utilities. The latter benefitting from increased usuage of power for cooling in the extended and massive heat waves last month. Given the continuation of hot weather in July, utility consumption is expected to be high again this month. More importantly, industrial production in manufacturing showed no increase in June from May and prior months industrial production in April and May were revised downward to negative readings. Indeed the revised numbers indicate overall industrial production in the second quarter showed no improvement from the first quarter. In addition, total industry capacity utilization declined in June from March levels. Manufacturing capacity utilization is also down in June from March levels and has not increased above the 74.4% level since April. As a point of comparison, this level of capacity utilization is well below the 79% long term average utilization rate of 1972-2010 .

Concurrent with the weak employment numbers already reported and the increase in the trade deficit reported for May, the weak retail sales and manufacturing data for June point to GDP growth in the second quarter lower than the 2% growth recorded in the first quarter. We raised concerns about this in our July 8th blog article. It now appears second quarter GDP growth will be in the 1.5%-2% range. Furthermore, we are increasingly pessimistic about a catlyst in the private sector that would rejuvenate the economy in the second half. Given the pessimism amongst consumers, and the retrenchment we have seen in the business sector, we are hard pressed to see what will “jump start” this economy in the absence of another Federal stimulus program which is not expected.

Morris R. Segall

March Employment: Still Encouraging But…

Morris Segall      "hard core" unemployed, business profits, Economic Growth, employment report, hourly earnings, inflation, job creation, jobs for college graduates, labor market "slack", labor market growth, unemployment

The March employment report continues to show the improving trends we have been recounting in our previous employment blog articles (March 6 and February 5, 2011). The March report showed a second straight month of more than 200,000 new jobs created in the private sector. This is the highest consecutive level of private sector monthly job creation since well before the recession. According to the Household survey, nearly 1 million more workers have been employed since March, 2010.   

The March report showed a continuation of the positive trends of: fewer unemployed from the loss of part time work; a further increase in manufacturing jobs; another decline in the level of unemployed from 5-26 weeks, particularly in the important 15-26 weeks category; and further improvement in management and professional jobs in the important Business and Professional Services segment.

However, all is still not well in the job market despite the recent improvement. Temp jobs still comprise the “lion’s share” of Professional and Business Services employment. The labor market is not growing. The number of persons not in the labor force or marginally attached continues to  grow and the employment/population ratio still stands at a recessionary level of 58.5%.  The increasing “hard core” unemployed of 27 weeks and longer comprised almost 46% of the total number of recorded unemployed in March versus just under 44% in March of 2010. This is becoming a major socio-economic dilemma for this country. Many of the jobs created in March were lower wage service jobs in healthcare, wholesale and retail trade and in the leisure and hospitality industries. Compounding this issue is weak wage growth overall. Average hourly earnings reflected in the March employment report showed annual growth of 1.7%, far less than the nearly 4% annualized growth in nominal consumer prices for the six month period ending in February.  Our March 7th website article on inflation highlighted the increasing problem of rising prices for consumers and businesses. Continued price escalation which pressures consumer discretionary spending and business profits could hurt further permanent hiring gains. 

So while the recent trends in employment, as reflected in the monthly jobs report and weekly first time unemployment claims, are showing concrete improvement, the gains are not uniform and still leave a large amount of “slack” in the U.S. labor force. In addition, there are far too many instances where mature, experienced workers and recent college graduates cannot find meaningful and permanent jobs with good salaries. This will hurt economic growth, longer term, if it is not corrected. However, in the near term,  we remain optimistic the recent gains and improved outlook for job creation can be maintained for this year and into next.

Morris R. Segall

February Employment Report: More “Green Shoots”

Morris Segall      Employment "green shoots", employment report, February employment report, positive employment trends, turning the corner on unemployment, unemployment

The monthly employment report for February showed more “green shoots” of positive employment signs that we mentioned in our February 5th blog article on the “ January Employment Report”, and along with other recent empirical and anecdotal data, are leading us to believe we may be turning the corner on unemployment. We note the following positive data in the February report that builds on the encouraging trends we have noted since November:

1. The number of persons working part time for economic reasons declined again by 67,000 from January and has declined by 760,000 since October, 2010. This includes persons who are working part time due to business conditions and persons who could only find work part time. 

2. The number of persons unemployed for more than 15 weeks declined in February by over 300,000 from January, including a decline of over 200,000 in those unemployed 27 weeks and longer. Since November, the numbers of such unemployed have declined by over 670,000 and 330,000, respectively.

3. Total private sector payrolls increased in February by over 220,000, well above the monthly average of approximately 100,000 gains of the past year, and included widespread and significant gains in most goods producing and service industries.  Manufacturing employment has grown for four months and construction employment has shown a gain after more than a year of decline. In the important Professional and Business Services segment, employment is picking up in key sectors aside from temporary workers which have fueled virtually all of the gains in this sector. Management and Technical Consulting employment has increased by 25,000 since October and Administrative and Support Services has grown by over 150,000 jobs since October. In addition, architecural services as measured by the Architectural Billings Index has moved from retrenchment to expansion with readings of 50 and above since November, 2010. This is the most encouraging growth in these sectors since the recession.

4. As we forecast in our previous blog article of January 9th and our website article of December 6, 2010, previous months employment have been revised upward, including November and December, 2010 by 22,000 and 49,000, respectively, and January, 2011 by 27,000.

5. There are other positive indications such as an increase in the average workweek and manufacturing overtime and increases in job recruitment in financial and accounting, IT and new business development positions and an increase in marketing and advertising spending by businesses. In addition, an increasing number of industries, 68%, were hiring in February versus 60% in January and 58.6% in December, 2010. Lastly, the number of first time unemployment claims for the week ended February 26 fell to 368,000, the lowest level since May, 2008 and importantly, below the key 400,000 for the first time since the recession. This is a very bullish employment development.

These positive trends and developments are lending credence to the improved 9% employment rate attained since November and augur well for further employment gains as the economy continues to improve as we expect (See our website article, “Great Expectations-2011″, January 6, 2011).

Morris R. Segall, CFA, CIC

January Employment Report: Weak but Contains “Green Shoots”

Morris Segall      "green shoots" in employment, 2009 economy, 2010 employment data, employment report, future trends, strenthening 2011 economy, unemployment, winter recovery in jobs

The January monthly employment report reported on Friday showed a dispappointing creation of 36,000 jobs versus the 150,000+ again expected by economists and analysts. 2010 job market data for both the Household and Business Surveys have been revised to reflect new Census numbers and new seasonal adjustment and other measurement changes. Since October’s 171,000 revised level of new jobs, November, December and now January’s job growth have not been close to the 150,000 level expected since October. Yes, the revisions to November and December job growth numbers  have been positive, as we expected, amounting to a cumulative 40,000 additional jobs from previously reported data. Nonetheless, the average number of new jobs created in November and December of last year amount to a weak level of slightly over 100,000. We have no doubt the very low level of job creation in January was negatively affected by harsh winter weather and expect an upward revision when February monthly job data is reported because of the absolutely low level of job creation reported. We also believe the weather in January interrupted timely and more complete survey reporting. However, December winter weather was harsh also and still allowed for over 120,000 new jobs being created. In addition, the weather so far in February continues to be severe, so it might be a March thaw before job creation, per the monthly surveys, show a more normalized pattern. In addition, major benchmark revisions to 2010 data will be forthcoming in February which will reflect new readings on the 2010 labor market. Finally, the unemployment rate surprisingly dropped for the second month to 9%. However, the drop in the unemployment rate since November primarily reflects a decline in the labor force of over 750,000 workers, a sign of continued discouragement among American workers.

Despite the low level of new jobs reported, the January employment report shows some continued improvement in  labor market trends that we mentioned in our January 9th blog article. Namely, further improvement (+ 49,000) in manufacturing employment making it three consecutive months and a cumulative increase of 78,000 jobs in this important sector. It supports the strengthening in the manufacturing sector in the fourth quarter of last year which is leading to increased hiring. In addition,  jobs were created in wholesale and retail trade, in furtherance of the fourth quarter hiring in these sectors. This reflects the strong retail sales trends in the fourth quarter of last year and the positive indications for retail sales in January as recently reported by major retailers. Lastly, the January data show a drop in temporary help hiring, the first such decline in a year, and significant increases in IT and administrative jobs indicating a broadening of permanent hiring in the important Professional and Business Services category. Continuing a positive trend first seen in December, job losses due to the ending of temporary assignments dropped again by nearly 500,000 and the number of  unemployed 5-14 weeks in duration dropped by 168,000 and are down over 400,000 since October. Thus, while the overall employment situation is still weak, we see “green shoots” in the monthly data and improvement in the weekly unemployment claims data. Other positive data on consumer and business spending and manufacturing orders and production augur well for further improvement in job creation going forward.

Morris R. Segall, CFA, CIC

December Unemployment: Still a mixed Story

Morris Segall      employment report, improvement in unemployment trends, unemployment

Friday’s unemployment report for the month of December continued to show the mixed data we have been seeing since late last summer. While the unemployment rate for the month dropped steeply to 9.4% from 9.8% in November ( due primarily to a contraction in the labor force), the job creation in the month was a disappointing 103,000 jobs. Estimates of new job creation for December had ranged from 150,000 to 300,000. Consistent with our comments in our December 6, 2010 website article on November unemployment, we believe erroneous seasonal adjustment factors and incomplete business survey results are again understating new job creation in the initial monthly report. As we stated in that article, we believed the very low job creation data reported initially for the month of November, 2010 would be revised upward. Indeed, in Friday’s December monthly report, November job creation was substantially revised upward from 39,000 to 71,000 and October’s job creation data was also substantially revised upward from 151,000 to 210,000. In fact since July, revised monthly job data has shown a cumulative increase of 280,000 additional jobs being created versus initial estimates. We had stated in our December 6 website article that we noted the trend of upward revisions to the initial job creation data and the revisions in the December report confirms this trend. We expect a similar upward revision to the December data when the January monthly data is reported and when the semiannual revisions to 2010 data are made in February. We base this on the large reduction (over 500,000) in December in the number of people who have lost their jobs due the completion of  temporary jobs. This is the largest positive change in this category in a year. In addition, we also note a major positive shift in the number of unemployed by the duration of unemployment. The December report showed a reduction of over 500,000 people who have been unemployed from less than 5 weeks to 26 weeks. This also is the most dramatic improvement in this series since the end of the recession.

These positive trends do not change the fact that while employment is improving (we also believe there is a marked improvement in initial unemployment claims below the 450,000 level which had been a sticking point for so long), it is still well below levels necessary for accelerated economic growth. The fact remains that over 15 million Americans are unemployed and under-employed and over 6 million of these have been unemployed for over 27 weeks. The latter continues to grow and represents an increasing problem of long term unemployed. Labor remains a surplus commodity and wage growth in 2010 was less than 2%. The new fiscal stimulus of extended and new tax cuts enacted by the “lame duck” Congress aids the environment for increased job creation and offers the best hope since the end of the recession of improving employment. It remains to be seen if the promise will be fulfilled but the data is moving in the right direction and our optimisim for improvement has increased.

Morris R. Segall, CFA, CIC

Ben Bernanke, the Stock Market and the Economy

Morris Segall      Ben Bernanke, economy, employment report, GDP, government, stock market, trends, unemployment

After playing politics with Ben Bernanke’s nomination in the wake of last Tuesday’s election loss in Massachusetts, the Democrats with help from the stock market on Friday, thought better of their populist pandering on Monday and began to rally around the beleaguered Fed Chairman. Criticism began late Friday with the stock market selloff and built up over the weekend. In our blog article of December 8, 2009, “Ben Bernanke: Hero or Goat“, we warned of the market ramifications of politicizing the Fed and its Chairman’s reappointment process. Congress got the message over the weekend and will now probably vote to reappoint Ben Bernanke.

Friday’s stock market sell off culminated a week that saw the market decline over 500 points and erased the gains accrued in the first two weeks of the year. After rising virtually non stop since its lows in early March of last year, the stock market entered 2010 strectched and overdue for a correction. Last week’s market decline could be the beginning of such a correction. Despite good news on corporate earnings and sound fiscal action on the part of the Chinese government to curb speculation in their economy, stocks sold off reversing their pattern of seeing the “glass half full” on virtually all economic and corporate news. It remains to be seen if this new pattern of stock price decline will revert to the short lived selloffs of last year or develop into a long overdue correction. Such a correction would be good for the stock and commodity markets longer term. The latter have been particularly ebullient over the last year with outsized gains that are ripe for profit taking.

In a couple of days we will get our first look at the fourth quarter GDP. Consensus estimates are for growth of 4%-5%. In our blog article, “Third Quarter GDP Revised Down“, November 25, 2009, we stated “strong contributions in consumer spending and business fixed investment would be needed from downwardly revised third  quarter GDP levels”.  After watching numbers “see saw” in housing, unemployment and retail sales in the fourth quarter, we believe fourth quarter GDP will be within consensus estimates led by large gains in business fixed investment, notably machinery and equipment, and government spending with a solid contribution from personal consumption and a positive contribution from net exports. Since the third quarter of last year the manufacturing sector is the strongest part of the economy with factory orders and shipments maintaining their recovery from depressed recession levels. However, the strength in fourth quarter economic data is not expected to be sustained in the first quarter of this year. Post holiday retail and housing sales are expected to dip leaving economic growth to the government and industrial sectors. Economic growth is still dependent on government stimulus in the face of continued high levels of unemployment and the improvement in unemployment is still the key to sustained economic recovery. At this time we do not expect a “double dip” recession when government stimulus ends in the second half of this year but the visibility of economic growth is clouded by the stimulus programs which have distorted the normal trends of economic recovery and have resulted in a “sawtooth” pattern of economic data since the recession ended in the third quarter of last year. We expect that to continue until the private sector can sustain this recovery on its own.

Morris R. Segall, CFA, CIC

Today’s Economic Landscape and What’s on the Other Side

Morris Segall      2009 economy, Add new tag, business landscape, Capital Markets, consumers, crisis, debt, economic, economics, employment report, future trends, GDP, government, recession, unemployment

We recently updated our presentation on today’s economic landscape and what’s on the other side with some fresh data.  We hope you continue to find value in our slides:

November Unemployment: Is this the Peak?

Morris Segall      consumers, debt, economic, economics, economy, employment report, GDP, government, recession, trends, unemployment

Today’s unemployment data for November was a surprising loss of only 11,000 jobs, well below economists’ expectations of 100,000-150,000 jobs lost in the month. In addition, the unemployment rate for November declined unexpectedly to 10% from October’s 10.2%. Consensus expectations were for the unemployment rate in November to be flat at best with October’s cycle high. The Labor Dept. also revised downward previously reported job losses in September and October. Monthly job losses have been revised downward for each month since August by a total of over 200,000 jobs. Since August, monthly job losses have averaged below 200,000 versus over 300,000 average monthly losses in the May-July period. The decline in monthly job losses parallels the strong improvement in first time unemployment claims reported weekly. Since mid September, first time unemployment claims have fallen approximately 100,000 and are now running at approximately 450,000 for the last two weeks in November.

In isolating the areas of reduced job losses we note that healthcare continues to be the area of the economy that has consistently added workers during the recession. Since September, healthcare has added an additional 100,000 workers and nearly 900,000 workers since the recession began in December of 2007. Other areas of job improvement since September are: the federal government and state government education accounting for an increase in approximately 50,000 jobs; and professional and business services adding over 100,000 jobs largely in temporary help services.  Importantly, for the first time this year, the average workweek increased to 33.2 hours from a cycle low of 33.0 hours in October.  The average workweek improved more in the manufacturing sector expanding to 40.4 hours from 40.0 hours in September. This reflects the recurring order and shipment strength in the manufacturing sector since last summer.

Conversely, most other areas of the economy continued to record job losses including manufacturing, finance, construction, retail and wholesale trade and information services. While the Labor Dept. reports almost 41% of reporting industries are now hiring, a cycle high, that leaves nearly 60% that are not. The surge in temporary help jobs indicates businesses are wary of the economic recovery and are reticent to add to payrolls. Furthermore, the labor force has declined by over 100,000 workers since September indicating an increase in discouraged workers despite the improvement in the economy. The decline in the civilian labor force would also partly explain the decline in the unemployment rate in November. Another benchmark of employment in the weekly and monthly reports indicate no improvement in the numbers of long term unemployed and under-employed workers. In fact, the numbers of long term unemployed increased to over 9 million or 38% of total unemployed at the end of November, a record level.  In addition, while first time unemployment claims have declined sharply, they are still recording well above 400,000 claims per week. Finally, the response from consumers in recent surveys indicate jobs are hard to get by an overwhelming margin despite the economic improvement in the third and fourth quarters. These measures do not support the monthly improvement in employment reported by the Labor Dept. since August and we have repeatedly said so in our blog articles on the monthly employment reports going back to last July.

Nonetheless, if the monthly employment report from the Labor Dept. is indeed true and not distorted by seasonal adjustments and faulty assumptions that are part of this survey’s results, then  it would appear that unemployment in this cycle is peaking and job creation is virtually around the corner early next year. This would be well ahead of consensus expectations, including our own, in projecting a peak in unemployment and the transition to job creation in the middle and latter part of 2010, respectively. It is important to note that the Labor Dept. will be making final revisions to its 2009 monthly employment data in March of 2010. In its initial revision to 2009 monthly employment data in August, the Labor Dept. revealed that unemployment this year was actually almost 900,000 workers higher than originally reported. Similar revisions were made to monthly data in 2007 and 2008. With that as a background and the contradictory results of other unemployment data and surveys, we are skeptical the employment cycle is turning this strongly and this fast.

Morris R. Segall, CFA, CIC

The September Employment Report: More Unsettling News

Morris Segall      2009 economy, business landscape, consumers, economic, economics, employment report, unemployment

Friday’s monthly employment report for September was bad. September job losses, per the Business Establishment series, was a -263,000, worse than analysts projected. Job losses were widespread between manufacturing, construction and a huge 147,000 loss in service sector jobs. The stated unemployment rate increased to 9.8%, another record level. The unofficial unemployment rate that includes underemployed and discouraged workers rose to 17%. The average workweek declined to a record low 33 hours and the employment to population ratio declined to a record low of 58.8%. That means less than 60% of the available working age population are employed in full time jobs. Unemployment rates increased in all demographic groups led by teenagers at a crushing 26% and minority groups in the low to mid teens. The unemployment rate for adult men escalated to over 10%. While these numbers have chronic economic implications they also have negative social impact as well and we are seeing it in an increase in crime, divorce, domestic violence and physical and psychological disorders. We wrote about the social and emotional toll of this recession in our website article of March 23rd, “ I am Mad as Hell…“. The scars from this growing and continued high level of unemployment will be felt long after the economy recovers.

As if the current level of unemployment were not distressing enough, the Labor Dept. announced that a preliminary estimate of its annual benchmark revision to the monthly unemployment data shows that private sector employment going back to March of this year is lower than originally reported by 855,000 jobs. In a previous blog article, “The July Employment Report…“, August 10, 2009, we stated that we believed recent monthly unemployment numbers would be revised downward when the annual revisions are made next March. The 855,000 increase in lost jobs is a PRELIMINARY estimate and we are expecting it to go higher when the final revisions are made next year.

Friday’s unemployment data on the heels of Thursday’s increase in first time unemployment claims is the latest in a string of weakening economic data last week. We stated in our last blog article, “The Economy, Capital Markets…“, October 1, 2009, that we are getting “uneasy about the underlying improvement in the economy”. Friday’s unemployment report is more unsettling and increases our unease.

To be sure we need to see more economic data for the month of September before making revisions to our economic and capital market outlooks. However, we are advising our capital markets clients to take some capital gains where tax considerations are not an issue and hold onto cash as a defensive measure. We still believe there was enough “pop” in the government stimulated economy in the third quarter to generate 3%+ GDP growth. But we are increasingly unsure about subsequent quarters as government stimulus wanes. If our fears are realized, equity markets here and abroad have considerable downside risk from current levels. As we have stated repeatedly in previous blog and website articles, there is no recovery without the consumer moving “goods off the shelves” on a continuing basis. Worsening levels of unemployment just keep postponing that development. Investors and businesses will need to be flexible and nimble in planning for next year. Stay tuned as we continue to analyze data and events over the remainder of this year.

Morris R. Segall, CFA, CIC

The July Monthly Employment Report: More Good News But…

Morris Segall      2009 economy, Cash for Clunkers, consumer credit, economic, employment report, Establishment Survey, Federal Reserve, government, unemployment

On Friday, the Labor Department reported the monthly employment situation report for the month of July. The Establishment Survey, the one most widely used as the benchmark for measuring monthly job creation showed nonfarm payroll employment declined by 247,000 in the month of July, a number better than widely held forecasts. It is the lowest level of monthly job losses since last August before the massive economic declines in the fourth quarter of last year and the first quarter of this year. It is also two thirds lower than the peak level of monthly job losses recorded in January of this year at over 740,000. With a number this low, naturally job losses in most major industry sectors measured by the survey saw significant declines in job losses from the surprisingly weak June levels. The exception was retail trade which saw job losses in this category double from 21,000 in June to 44,000 in July reflecting the continued poor consumer spending environment. Nonetheless, economists and financial commentators viewed the dramatic improvement in the monthly numbers as further evidence of the recession’s end and imminent economic recovery. To be sure, we concur the huge decline in monthly job losses reported since March’s 652,000 follows the general trend in first time unemployment claims which peaked at 674,000 in late March and has declined to 550,000 as of August 1st and signifies a peaking in new job destruction in this cycle and fortifies other economic data suggesting the recession has bottomed.

However, as we have written in previous posts, “Current Economic News Needs a Dose of Reality“, May 15th, 2009, the dramatically improved job loss numbers in the government’s Establishment Survey continues to be at odds with other government employment reports and empirical data we are getting from job seekers and businesses. Inconsistencies include:

1. While job losses in July measured 247,000 and a 9.4% unemployment rate, the civilian  labor force saw over 400,000 people leave it in July versus June and over 570,000 since May. The civilian labor force participation rate in July fell to 65.5%, matching the lowest level of worker participation in this cycle in March of this year.

2. While monthly job losses per the Establishment Survey have declined from 652,000 in March to 247,000 in July, first time unemployment claims, representing new job layoffs, have declined from 674,000 to 550,000 over the same period. A figure twice as high as the establishment survey estimate.

3. The number of unemployed workers including discouraged workers and part time workers who cannot get full time employment continued to increase in July. The number of people leaving or not in the work force increased substantially (over 1 million people) in July reflecting discouragement with finding gainful employment. This is consistent with the empirical information we hear from job seekers who say jobs are very hard to land and employers who tell us they are still not hiring and will have to lay off more workers if sales do not pick up.

4. The average work week increased by .1% to 33.1, the second lowest work week during the entire recession. We will see if the recent three month trend of monthly job losses per the Establishment Survey of approximately 330,000 is accurate. We continue to believe these recent numbers are vulnerable to downward revision when the Labor
Department makes it annual benchmark revisions next March. For now, the consensus is taking the numbers at face value.

There was another very important economic announcement on Friday. The Federal Reserve released its report on Consumer Credit for the month of June and for the fourth consecutive quarter, consumer credit declined. Consumer credit contracted at nearly a 5% annual rate in June, nearly double the 2.6% annual rate of decline in May. Since its peak in the third quarter of 2008, consumer credit outstanding has declined 3% or over $75 billion at the end of June, 2009. Most of this decline has occurred in revolving credit, i.e. credit cards. Since the third quarter of 2008, revolving credit has declined 6% or over $55 billion. Clearly consumers are continuing to pay down their debt in an attempt to de-leverage their balance sheets. Combined with a continued high savings rate in excess of 4% at the end of the second quarter, it is clear American consumers are paying down debt and increasing their liquidity. These trends and the existing high levels of unemployment continue to suppress consumer spending.

The government is artificially creating increased consumer spending and retail sales via its “Cash for Clunkers” program and the other stimulus package spending that will be impacting the economy over the next four quarters. However without job creation rather than “less worse” job destruction, a sustained consumer led spending increase is unlikely. In fact, to the extent the government creates consumer spending near term, it could result in deflated consumer spending longer term when the government stimulus ends. The key to a real economic recovery continues to be the revival and return of the consumer, with a job and the financial capacity and creditworthiness to spend. The consumer led us into the recession. He will have to lead us out. Recovery in this cycle was always going to be a long stretch in re-liquifying and de-leveraging the consumer so he could “get back in the game”. He is doing just that but the loss of his job is making those tasks longer and more difficult. While these trends hurt the economy in the short term, they will help sustain the recovery in the longer term.

Morris R. Segall, CFA, CIC

June Employment Report—”Green Shoots” Fading

Morris Segall      business, economics, economy, employment report, unemployment

Thursday’s release of June unemployment numbers has cast a pall over the economic recovery thesis for the second half of this year. The report was pervasively weak. The overall job loss reported of 467,000 was much higher than expected and the breadth of the job losses was even more disappointing. Every industry sector except healthcare saw
increased job losses in June than in May with striking increases in the Professional and Business services and Government sectors. The negative tone and implications of the June report sapped the stock market on Thursday, knocking the major market averages down almost 3% and leading market sectors like commodities down even more.

We believe the June employment report and the attending stock market reaction signal the beginning of the long awaited stock market corrections both here and abroad as the prevailing optimistic sentiment regarding the U.S. economy is now in doubt. This change in sentiment and the upcoming earnings guidance from companies reporting second quarter results this month are expected to put increased pressure on the elevated stock markets. We expect the capital market declines to be led by commodities, particularly energy, which have paced the market gains since March. The weakening economic outlook diminishes the recovery story for materials and energy given a protracted weak demand environment.

Our capital markets strategy of holding significant cash reserves in anticipation of market corrections, while the U.S. economic recovery was in doubt, should provide a cushion to near term market declines but more importantly, provide liquidity to invest in the market at lower prices. We are “bullish” on stocks over the 2010-2012 period and believe the stock market lows of this past March are the cycle lows for this recession. But the markets, particularly foreign stock markets have appreciated very much, very fast and needed confirmation of an economic recovery to stimulate an upsurge in corporate earnings to sustain the recent market strength. Failing that, the markets were in our opinion, fully valued. So we will watch the slope of market weakness to see where it lands but be prepared for at least a 5% to possibly 10% correction, particularly if corporate earnings guidance for the remainder of this year and the early part of next year is disappointing.

Morris R. Segall, CFA, CIC